After easy money, getting back to normal will be faster than hoped

How Lesetja Kganyago responds will be one of his bigger tests

The nub of this past week’s market volatility is that workers in the western world are going to be paid more for their labour. With economic growth already feeding into inflationary pressures in those geographies, the prospect that citizens will receive higher wage growth has markets in a tailspin. It’s clearly a case of good news being bad. You’d think that after years of low wage growth across those parts of the globe, a rise in household earnings would be good, and only further cement the idea that the worst of the 2008 crisis is well and truly over. That just perhaps the good old days of a world when General Motors built gas-guzzling monstrous vehicles such as the Hummer for mass consumption were on their way back.

The thought of a better dollar or euro wage means an even quicker end to the era of cheap money. It’s been a lucrative era for investors, since never before have their portfolios reacted as bullishly after a global recession as they have after the last one triggered by the collapse of US investment firm Lehman Bros. Since that firm shut its doors, the JSE All Share has more than doubled.

While some may say company earnings have also played a significant part in the rally, the reality is that the greatest thanks should go to former US Federal Reserve chairman Ben Bernanke. As head of the most influential banker by virtue of its custodianship of the world’s reserve currency in the dollar, it was his policy reaction that would have either sunk us all more than a decade ago or found a way to stabilise the financial system. His response ensured liquidity in the system, lowering rates to record lows and embarking on an untested experiment of quantitative easing, of which we had three rounds. It’s a programme that may have long ended, but record low rates have remained a constant. With strong growth in the US, UK and Europe and now the dawn of rising wages, it’s a constant that is under threat. As inflation raises its head, the only weapon is to make money more expensive by raising rates.

The world’s leading central banks are going to have to react, and while they’ve long alerted markets to the inevitability of an end to accommodative monetary policy, the pace of normalisation will be faster than expected. This risk underpinned the aggressive selling in equity markets. Just how the Reserve Bank under Lesetja Kganyago responds to a faster tightening of monetary policy in the US will be one of his bigger tests — after, perhaps, surviving a Jacob Zuma presidency. Should tightening occur at a faster pace, the dollar would strengthen. Emerging-market currencies would come under pressure, leaving Kganyago and his peers in the developing world with no real choice but to follow suit and hike rates.

This is quite a shift in economic sentiment from a few weeks ago, when a buoyant Team South Africa left Davos in Switzerland with hopes of better economic times ahead and the real possibility of a

Reserve Bank being in a position to provide relief to consumers by reducing borrowing costs because of a stronger rand and benign inflation. But let’s not quite yet prick that bubble.

I’m not that certain 2018 will play out along those lines, no matter what the market fears are today. While leaders of the Fed or the Bank of England profess independence and that they only bow to the realities of the economy before them, they may very well bow to other pressures, political ones.

If a trade war is what Donald Trump comes with, it’s one won with a cheaper dollar and rising stock markets. A rise in borrowing costs is not good for business. With its still frail growth, can the Bank of England really afford to raise rates ahead of the final Brexit divorce in March next year?

The world is far different to what it was before 2008; the politics, I suspect, worse or just a truer reflection of what has always been under the carpet. Uncertainty is still very much part of the system, not to mention the destabilising effects for a fourth industrial revolution that’s eating into the competitiveness of every industry. Fiscal and monetary policy hasn’t quite caught up yet.